Towards Harmonisation Of Internal Sharia Audit In The Gulf Cooperation Council's Islamic Banks

Fadloun, Muhammad Saeed

Abstract

This research examines the critical role of internal Sharia audits in ensuring compliance with Sharia principles within Islamic banks, focusing on Gulf Cooperation Council (GCC) countries. While Islamic banks operate under both conventional corporate governance and Sharia governance frameworks, most previous studies have focused on the Sharia Supervisory Committee, which oversees compliance but is not involved in day-to-day operations, potentially leading to gaps in accurately assessing the Sharia compliance of Islamic banks. This study shifts attention to the underexplored internal Sharia audit department, responsible for providing assurance to the Sharia Supervisory Committee and other stakeholders on whether Islamic banks adhere to Sharia principles.
Through semi-structured interviews with 14 practitioners, significant gaps in internal Sharia audit practices across the GCC were identified. Additionally, interviews with a senior representative of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and a GCC regulatory advisor provided deeper insights into these shortcomings. The research also used documentary analysis, applying an index based on AAOIFI’s internal Sharia audit standard to assess regulatory requirements for internal Sharia audit. The results revealed that no Sharia audit regulatory requirements in the GCC fully adhere to AAOIFI internal Sharia audit standard, with scores ranging from 7 to 17 out of 25. This points to a need for stronger regulatory enforcement, particularly as some GCC countries exhibit more significant deficiencies.
Key findings highlight that the internal Sharia audit is often viewed as a cost centre rather than a value-adding function, contributing to compliance weaknesses. Interviews with regulatory experts reinforce the need for a more robust regulatory approach to Sharia audits, akin to the European corporate governance model. The research suggests that regulators should treat Sharia compliance as seriously as other regulatory concerns, such as fraud or money laundering, to enhance Sharia governance and protect stakeholders.
The study offers recommendations for improving internal Sharia audit practices, with implications for regulators, Islamic banks, and standard-setting bodies, ultimately aiming to strengthen internal Sharia audit and integrity in the Islamic banking sector.

• Thesis Type: Thesis
• Deposit Date: Dec 13, 2024
• Publicly Available Date: Feb 24, 2025
• Award Date: Jan 23, 2024